Tax time 2017: ATO remains ambiguous about which small businesses get a tax cut

Accountants want the tax office to clearly define which businesses will be eligible for company tax cuts under the Turnbull government's signature tax policy, but to avoid potential hot water, the tax man is remaining ambiguous.

The Australian Taxation Office (ATO) has started processing small business company tax returns at the 27.5 per cent tax rate, but warns that businesses who are still using the higher 30 per cent rate need to seek an amendment themselves as the agency will not automatically do it.

This is because there's still uncertainty about who is "carrying on a business".

In July, Revenue and Financial Services Minister Kelly O'Dwyer promptly issued a media release that indicated the government may change the law to deny tax cuts to companies making money from passive investments, after media headlines that discretionary trusts may be eligible.

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Financial Services Minister Kelly O'Dwyer warned legislation may be needed to clarify which businesses are eligible for a tax cut.Credit:Wayne Taylor

Ruling interpretation 'premature'

This came after an earlier ATO ruling expanded the range of companies eligible for tax cuts under the the Turnbull government's Enterprise Tax Plan, which aims to over time reduce the corporate tax rate for all companies from 30 per cent to 25 per cent.

Ms O'Dwyer said the ATO ruling was in draft form and it was "premature" to suggest eligibility for lower rates had been broadened.

She said the government's policy intent in relation to the reduction was to ease the burden on small and medium businesses, and "was not meant to apply to passive investment companies".

She added that: "If any further direction is required on the government's policy intention by the ATO it will be provided by the government."

Michael Croker, tax policy head at Chartered Accountants Australia and New Zealand, says there's too much uncertainty about the law.

Not possible to identify

For the 2016-17 tax year the company tax rate is being reduced from 28.5 per cent to 27.5 per cent for small business entities with turnover of less than $10 million (which is an increase from the $2 million threshold in previous years). This will also impact franking credits.

ATO Second Commissioner Andrew Mills has vowed to be considerate of small businesses with "cash-flow issues".Credit:Wayne Taylor

The problem is, the onus is on businesses (or their tax advisers) to know whether they are eligible for a tax cut. The ATO says on its website that where a company has lodged their 2016–17 tax return using the 30 per cent tax rate, and believe they are entitled to the 27.5 per cent tax rate, "they should seek an amendment as we are unable to accurately identify these taxpayers".

It says this is because "it is not possible to definitively state whether a particular company is carrying on a business".

Tax debts will only be reported in cases where the tax debt is over $10,000 and has remained unpaid for over 90 days, and the debt is not in dispute.Credit:Karl Hilzinger

There's potential for the ATO to adopt a different position to the taxpayer and/or for the government, if they disagree with the ATO, to come up with a legislative solution

Michael Croker, Chartered Accountants

"This is always question of fact," the ATO states. "While most companies will carry on a business in a general sense, this does not mean that every gain made by a company will be ordinary income and assessable."

Accountants worried

But Chartered Accountants tax leader Michael Croker said that since the ATO had not yet stated what criteria they will be using to judge whether a business is eligible, it would create a compliance nightmare.

"It can create churn ... if an agent's professional judgment proves incorrect," he said.

"The lack of clarity is around passive investment companies – where there's no shopfront or employees, no registered business name; it's just a mum and dad company with investments in listed shares, a rental property and bonds.

"There's potential for the ATO to adopt a different position to the taxpayer and/or for the government, if they disagree with the ATO, to come up with a legislative solution."

"Debts that are genuinely in dispute will not be reported nor will debts under payment arrangements," he said. "Taxpayers who are working with us to resolve their debt will not have it reported."

The ATO will also notify a business in writing that it intends to refer its tax debt to a credit bureau before that information is passed on, he said. It will also establish agreements with credit reporting bureaus to manage the reporting and administration of tax debt information.

A number of overseas jurisdictions such as New Zealand, Britain, Ireland, Norway and Finland are publishing tax debt information on a public register or sharing it with credit bureaus, he said.